Jim Middlebrook, the founder and president of Vortech
Engineering, was feeling the squeeze of success. After founding his
Oxnard, California, company in 1990 to develop performance parts
and accessories for the automotive aftermarket, by 1997, he'd
revved up sales to more than $7 million.

But finding growth capital was still a problem. With the
government taking a large portion of a company's earnings right
off the top and tooling costing a pretty penny as well, Middlebrook
says, "In the end, there's not a lot left to make the
company grow."

Middlebrook knew he needed growth capital to expand in his
existing market and enter the marine and industrial markets, but he
avoided the usual sources, such as venture capitalists and angel
investors. "They want too much involvement or too much
equity--or both," says Middlebrook.

In early 1997, a commercial banker suggested Middlebrook
consider an Industrial Development Bond (IDB), which provides
long-term financing at low rates to manufacturing companies
investing in fixed assets, such as land, buildings and equipment.
The banker put Middlebrook in touch with Dan Bronfman, an IDB
consultant and founder of Santa Monica, California, Growth Capital
Associates.

Bronfman says IDBs are largely misunderstood and underutilized
because prior to tax legislation in 1986, they were the province of
large corporations, which used them to finance manufacturing
facilities, distribution centers and retail outlets. Today,
Bronfman says, IDBs--worth approximately $1.5 billion annually
nationwide--finance companies involved in manufacturing or
value-added processing that have sales between $5 million and
$30 million and are looking for net financing proceeds of
$1.5 million to $8 million.

David R. Evanson's newest book about raising capital is
called Where to Go When the Bank Says No: Alternatives for
Financing Your Business(Bloomberg Press). Call (800) 233-4830
for ordering information. Art Beroff, a principal of Beroff
Associates in Howard Beach, New York, helps companies raise capital
and go public.

Profile of a Lender

At the broad-brush level, there are certain key criteria that
would-be IDB borrowers must consider--and ultimately meet.

First, the "B" in IDB stands for bond, which means
it's a loan. Like other lenders, IDB issuers look for stable
and predictable cash flows. Therefore, start-ups, prerevenue-stage
companies and small independent businesses need not apply.

Next, the proceeds from an IDB must go toward paying for fixed
assets and manufacturing operations with no more than 25 percent
earmarked for the purchase of land. Finally, the maximum amount
that can be raised is $10 million, a figure further
constrained by the borrower's capital expenditures in his or
her region. For example, if someone had a company in Ohio that only
made $100,000 in its immediate area while conducting most of its
manufacturing in other states, the $100,000 would still impact how
much the entrepreneur could raise in IDB financing.

For those whose needs and profile fit the criteria, the process
of acquiring IDB financing can be broken into three distinct
phases. But before delving into these steps, it's worth
mentioning that, unlike many other sources of financing, IDBs
aren't something entrepreneurs should pursue on their own;
it's analogous to trying your own case in court. A qualified
consultant can lead you through the process. The good news is, many
IDB consultants work on a success fee, which means they take their
fees out of the proceeds.

The first phase in obtaining IDB financing, Bronfman says, is
prequalification. This is largely a matter of determining whether
your company and the deal you have in mind will fly according to
state and federal requirements, and whether the business has the
financial strength to support bond issuance.

During this first phase, the potential borrower and his or her
consultant choose one of two basic credit structures for the deal.
The first option is a letter of credit (LOC) structure. Under this
arrangement, a bank guarantees repayment of the bond through the
issuance of a letter of credit. Generally, the fee the bank charges
for this guarantee is 2 percent of the bond issue proceeds.
The second option, known as a private placement structure, is to
have an institutional investor buy the bonds directly.

Of the two structures, Bronfman prefers the LOC. "It's
a much more competitive interest rate market, with lower rates and
more opportunity for a flexible structure on the deal, such as
interest-only payment periods or optional balloon payments,"
he says.

If attended to diligently, Bronfman believes the
prequalification phase can be accomplished in five to 15 days.

The next phase of the process, according to Bronfman, is to get
state and issuer approvals. The language of IDBs can be
confusing--the term "issuer" is a case in point. In most
bond financings, the issuer is the company that receives the
proceeds from the deal. In IDBs, the issuer is a city, county or
state agency. In California, for instance, the California Trade and
Commerce Agency has statewide issuance authority. Across the
fruited plains, there are myriad of agencies entrepreneurs might
tap, but, according to Bronfman, it's the consultant's job
to find the one in your state that makes the most sense and will
make the deal work.

The importance of the issuing agency cannot be underestimated.
When a government body issues the bond instead of a private
company, the bond qualifies for tax exempt status, which means much
lower interest rates for the business owner. This is the heart of
the IDB's advantage.

Once the right agency is selected, approval must be sought,
which in most cases requires a hearing. Each state and issuing
authority has its own conventions, but Bronfman says applications
and approvals can typically be attained in 30 to 60 days. Approval
criteria include: the overall viability of the product; potential
for public benefits, such as job creation; and the financial
strength of the borrower.

After obtaining approval, companies enter what Bronfman calls
phase three of the process. Here, the team assembled by the
consultant--consisting of the bond counsel, the corporate counsel,
a rating agency, a trustee and a placement agency--goes to work
drafting the bond documentation and completing the sale of the
bonds. Once the funds are raised, they're placed with the
trustee, who disburses proceeds to the company and makes payments
to the bondholders. According to Bronfman, phase three can take
from 15 to 45 days.

Let's Be Realistic

While IDB financing can sometimes be accomplished in one hundred
days, it can take considerably longer. In Vortech's case, a
process that began in early 1997 wasn't completed until
September of 1998, when the company was finally funded.

Vortech was actually approved for IDB financing during the
latter half of 1997. But as Middlebrook learned, tax exempt
financing is a precious thing, and states only have so much funding
to allot. By the time Middlebrook was approved, the state's
allotment had run out. As a result, he deferred his IDB until the
next funding cycle. Meanwhile, problems had begun to surface with
the manufacturing site he'd initially selected. Further delays
ensued as he looked for, and eventually found, a new site.

But for Middlebrook, it was worth the wait. The interest rate on
his $3 million IDB averages 5.25 percent, and he has 25 years
to pay it back. If you could get bank financing for 25 years--which
you can't--the rate you'd pay would be at least 2
percentage points higher. Bronfman says that, doing an
apples-to-apples comparison, $4 million in IDB financing,
amortizing over 20 years at 5.25 percent, would cost $26,950 per
month. On the other hand, a bank loan amortizing over 20 years at 8
percent would cost $33,450 per month--a huge difference over the
life of the loan.

While the first thing everyone will tell you about the IDB
process is how tricky it is, get past the pessimism. Middlebrook
did. "I wouldn't recommend doing this alone," he
says. "But I can tell you this much: It's a lot easier
than trying to run a business."

Next Step

To find an IDB issuing agency in your state, call the Council of
Development Finance Agencies at (202) 857-1162 or call Dan
Bronfman at (310) 581-8888.